Market Insider

Favourable Heat?

June 16, 2017

Some hot, dry weather through the first few weeks of June in parts of Western Canada and the Northern Plains added some premium to the markets, albeit it’s started to fade with some rain finally falling and/or in the forecast. It’s now suggested that almost 90% of North Dakota and over half of South Dakota is experiencing drought conditions. In southern Saskatchewan, about 1/3 of topsoil moisture is considered to be in short or very short supply, although seeding is practically wrapped up. In the northern and peace regions of Alberta though, these regions are only about 2/3s and half-way done seeding respectfully, well behind the 5-year average of being done by this time. After trading sideways for most of the 2017 calendar year, we’ve seen some healthy rallies that have been sellable levels. Generally speaking though, while some hot temperature headlines are clearly grabbing attention, as prices creep up, we become more cognizant of the amount of grain still in the domestic and global pipeline for most crops and the many areas where conditions are generally favourable.

The U.S. spring wheat has clearly been suffering the worst as per the U.S.D.A., dropping 10 points in just 1 week to 45% of the crop rated good-to-excellent (G/E), miles away from the 79% crop rating and the 5-year average of 71%. North Dakota’s G/E portion dropped from 52% last week to 43% this week, South Dakota fell from 25% a week ago to 13% G/E now, and Montana took the biggest hit, dropping from 48% G/E a week ago to just 23% this week. The U.S. winter wheat harvest is accelerating with 17% of the crop now in the bin compared to the 10% that was combined at this time a year ago and the 5-year average of 15%. The G/E rating of the American winter wheat crop actually improved by 1 point to 50% G/E, but that’s still below the 61% G/E seen a year ago.

From a cash price standpoint in Western Canada, the PDQ cash grain website tells us that in the past month, hard red spring and CPS wheat values have catapulted. However, while we’ve seen 15-20% gains in the U.S. wheat futures markets in the past few weeks, wider basis levels on the Canadian Prairies have kept gains only at about half of this. Nevertheless, spot HRS wheat prices are above $7.00 CAD / bushel everywhere you look with some poorly seeded areas in Alberta sitting closer to $7.50, while CPS values are sitting above $5 for the first time in a long time. Durum values haven’t fell in line just yet, with values still playing around the $7 CAD / bushel for #2 and #3 quality but mid-$8 handles for the really good stuff that’s been sitting in bins for awhile. Canola hasn’t been able to rally as much, with new crop values playing around $10.50 CAD / bushel but itching towards that $11 handle again.

Ultimately, rural coffee row conversations around the world’s farming regions are asking “how high can this wheat market go?” While we know that U.S. and Canadian wheat production will be lower year-over-year by 17.5% to 78 million tonnes, a carryout of 30.3 million tonnes is about 22% lower than a year ago. Compared to 2 years ago when global production was still rising in the 2015/16 crop year, production between the 2 countries this year is only 7% lower and carryout is about 4% lower. If we look around the rest of the world, Australia’s crop was an anomaly last year and things are expected to be more average, the Black Sea’s wheat crop is seemingly on course for another decent year, and European production is up by about 4% from last year’s smaller harvest but still 6% below the record of 160.5 million tonnes in 2015/16.

The headlines (and the Twitter photos!!!) the rest of the world sees are just that the U.S. or Canada is in drought, not tha t it’s just specific areas, amplifying their thoughts of why the market should go higher. Intuitively, this creates more cognitive bias and managing risk can easily sway into the world of speculation. More simply put, with wheat prices at the best we’ve seen in 2 years, it’s easy to start questioning “how high can this go” and talking to buyers with “I’m waiting for (put in ridiculously high number here)” I’m not saying we don’t have more upside potential. Rather, I’m challenging you to think about timing of your next sale. More conclusively, I don’t think we’ll have a shortage of production, but it’s going to be more a question of what’s the available high quality product. This in mind, with rains in the forecast, we might see an improvement to crop ratings next week but, for now, we’re recommending holding onto any old crop wheat that has higher protein wheat (above 13% for spring wheat, above 11.5% for winter wheat) for at least another 2 weeks (and possibly longer, dependent on how these next 2 weeks go weather-wise). Accordingly, post that next target on FarmLead for any of the 140+ verified wheat buyers roaming the Marketplace to deal with you directly. The action has been and will continue to be hot with farmers finding favourable prices.